The increasing cost of living prompted by a spike in energy commodities and the resultant energy crisis, continue to make headlines not only in Israel but around the world. What makes things complicated is that it is a combination of factors that led to the current situation.
It all began after the economies around the world started exiting from Corona that caused a spike in demand in oil. The second and the main reason is the war in Ukraine and Russia’s natural gas blackmailing of Europe to shut off its supply. The third reason is the global push for a “green energy revolution” in time of war and the lack of infrastructure to sustain this transition.
Now, in and of itself, it is a good idea to diversify away from fossil fuels and eliminate dependence on OPEC producers of oil. But there needs to be a transition stage that will be available until the local economies are ready to make a switch to alternative sources of energy. The result of adopting of such a policy has prompted U.S. to stop issuing new fracking licenses for oil and gas companies, including the cancelation of the Keystone Pipeline from Canada. As you might remember, prior to Biden coming to Office, these were the companies that enabled the United States to become a net exporter of oil for the first time ever.
Therefore, the combination of above listed factors led to a jump in oil and gas prices. As a result, large corporations, especially the ones that are energy intensive are scaling back or tethering on a verge of bankruptcy. In some cases, governments had to come to the rescue and provide financial support to the firms in order to keep them afloat.
Following the example of China enacting a policy of regulating the supply of electricity to the nation’s large industrial plants last summer, several Asian countries are making plans to do the same. Concerns were raised in Europe when Belgium’s prime minister issued a warning that the EU economy may come to a standstill if the situation won’t improve regarding the energy situation in the near future.
With every energy crisis, the first ones to bear the consequence of expensive energy commodities are the drivers. When oil price rises, almost immediately the costs are passed on to the end consumers.
However, in Israel, it appears that the current energy crisis abroad, for quite a while, did not have the same effect locally. Since the beginning of the year, almost 200,000 new cars have emerged on Israel’s roads, 96% of which use petrol.
Although it is 15% less compared to sales during the same period last year, this is primarily attributable to a shortage of supply rather than a drop in demand. The use of cars continues to be at an all-time high. This is clearly evident in unprecedented congestion levels.
However, despite the Israeli consumers’ resilience, the energy crisis is beginning to trickle in and is having an indirect impact on the Israeli auto market.
As Israeli resources are scarce and all oil is being imported, the incentive created by the government to buy electric vehicles was having a positive effect. It makes economic sense to have EV as the owner becomes immune to the petrol prices and is able to have significant savings. However, as of recently, the electricity prices have gone up around 10% and though it is notably less expensive, further rises would certainly not go unnoticed. For instance, in Europe, this trend is already causing a slowdown in sales in EVs.
Another side effect of rising energy prices is the increasing price of cars. The cost of energy accounts for about a third of the overall cost of manufacturing new cars, including the cost of producing raw materials (steel, aluminium, plastic, etc.). And as energy prices rise, automakers pass those costs along to consumers by raising prices on cars.
Not last component in producing EVs is lithium which is used in batteries. And China remains the global leader in producing electric batteries. Moreover, during the last year 75% of EVs sold in Israel were produced in China. As a result of surge in demand for lithium and the consequent rise in its price, the Chinese manufacturers have been open about potential price increases.
It must be noted that fears of recession have affected the commodity prices across the board, with oil dropping to levels not seen since the end of the last year. However, the uncertainty created by the war in Ukraine may potentially exacerbate the situation on the energy market.
Therefore, despite its exceptional energy independence considering the different gas sources, Israel still remains vulnerable to the energy situation around the world. And if the situation does not change drastically in the near term, Israeli drivers will notice its effects in a big way.